On Optimal Pricing Model for Multiple Dealers in a Competitive Market

TL;DR

This paper extends the Avellande-Stoikov model to a competitive market with multiple dealers, deriving optimal pricing strategies and analyzing how competition influences spreads and profits.

Contribution

It introduces a generalized model for multiple dealers, providing explicit formulas for optimal bids, asks, and spreads under competitive conditions.

Findings

Optimal bid and ask prices are derived for multiple dealers.

Market competition affects dealer spreads and profits.

Insights into how parameters influence trading strategies and profitability.

Abstract

In this paper, the optimal pricing strategy in Avellande-Stoikov's for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers' trading intensities, their optimal bid and ask prices and therefore their spreads are derived when the dealers are informed the severity of the competition. The effects of various parameters on the bid-ask quotes and profits of the dealers in a competitive market are also discussed. This study gives some insights on the average spread, profit of the dealers in a competitive trading environment.